Greece is only the beginning

As we are nearly halfway through 2010 – scary, I know – I thought it would be a good time to see how my New Year’s predictions are panning out. In my December 2009 column, I wrote the following:
“My 2010 predictions can be summed up in one word: “insolvency”. To be insolvent is to be unable to pay one’s debt obligations. In my view, this trend will only get stronger on the individual, institutional, and state level.”
For this column, I’ll keep my remarks to the state level. Last year, how many times did you see Greece on the news? These days, you can’t turn on the television without hearing the latest on the Greek debt crisis. What is happening across the Atlantic is extremely important. For those of you who don’t know, Greece has been under tremendous international pressure to get its fiscal house in order. The world markets are refusing to buy Greek debt except at insanely high interest levels. Why? They don’t believe it will ever get paid back. Markets believe it has gone past the point of no return. Even when Greece announced severe cutbacks to its public service, an action that provoked riots and deaths, currency markets have continued to turn its back on the country.
Euro zone leaders and the IMF eventually had to step in and agree to a $146-billion bailout to restore confidence in the international markets. Only one problem: even with the bailout, the market still didn’t believe it would be enough to make Greece solvent. So European leaders went back to the drawing board and came up with a $1-trillion bailout scheme, the largest bailout in history. Incredibly, the effect of this massive liquidity injection lasted less than 24 hours. The Euro almost immediately began to plummet. This was the market’s way of saying, “It doesn’t matter what you do at this point – this thing is broken.” This all in bet by European leaders has been going horribly wrong. What’s their next move? A ten trillion dollar bailout? The market just doesn’t buy this whole charade.
Why is the market crucifying Greece? Because they know who is bailing them out. It’s other bankrupt nations. They know credit rating agencies have been downgrading the debt of Spain and Portugal. They know Ireland and Italy are also facing similar problems. They know this is the broke bailing out the broke.
One of the reasons for the hasty bailout is that France and Germany’s banking sectors are hugely exposed to Portuguese, Spanish, and Greek debt. Leaders feared a contagion effect, and didn’t want a run on their banks. They prevented a run on the banks (for now) but they have not prevented a run on the Euro currency and various national debts.
Greece is the canary in the coal mine. Once this European story plays out with the other nations I mentioned, currency speculators will turn across the Atlantic to the U.S. dollar. The balance sheet of the U.S. is no better than Europe. The dollar is currently benefiting from the European crisis as some investors are fleeing to it as a “safe haven”. This will only last so long. Eventually, investors will also abandon the dollar and run to the only immortal currency – gold. At that point, gold will soar well over $2000 an ounce. The monetary system as we know it will have to push reset and reinvent itself. Things will start again but it’s going to be a turbulent ride to get there.